Apr 1,2015 / News / Legal Brief

Joint procurement arrangements raise a number of concerns in relation to competition law. 

INTRODUCTION: WHAT IS JOINT PROCUREMENT?

The practice of joint procurement describes a variety of arrangements in terms of which various purchasers come together to collaborate in the sourcing of either the whole or part of their requirements.

Joint procurement agreements are aimed at combining demand in order to obtain better prices and purchase larger volumes on more favourable terms and conditions. Therefore, small and medium enterprises could achieve economies of scale and match buying power of their larger competitors thereby cutting back on the costs of doing business.

COMPETITION LAW CONCERNS

However, there are various competition law concerns that arise in respect of joint procurement arrangements.  A recent consent agreement[1] reached between the Competition Commission (“Commission“) and Columbus Stainless Proprietary Limited (“Columbus“) provides an example of where joint procurement,through a buyers’ cartel, involved a per se contravention of competition law.

The consent agreement is the result of the Commission’s investigation into a complaint against Columbus, Arcelormittal SA Ltd, Cape Gate Proprietary Limited, Scaw South Africa Proprietary Limited, Highveld Steel and Vanadium Corporation, Cape Town Iron & Steel Works, and the South African Iron and Steel Institute for alleged prohibited practices in terms of section 4(1)(b)(i) of the Competition Act 89 of 1998 (“Act“) in the market for the purchase of scrap metal.  The Commission found that from the period commencing in or about 1998 until at least 2008, these companies entered into an agreement, alternatively, engaged in a concerted practice of directly or indirectly fixing the purchase price of scrap metal.

What is of significant importance in relation to the issue of joint procurement, is that the Commission found that the respective companies co-ordinated and aligned their behaviour in the market for the purchase of scrap metal, acting as a buyers’ cartel.  The Commission also found that they had collaborated and acted in tandem with an upstream cartel of scrap merchants.

Furthermore, the Commission’s investigation revealed that these companies engaged in a concerted practice to fix the purchase price of scrap in contravention of the Act by co-ordinating and aligning their behaviour through meetings and correspondence and adopting 2 main interrelated mechanisms –

  • they together with scrap merchants collectively negotiated and agreed a standard pricing formula which was used to determine the purchase price of scrap metal and, on an annual basis, agreed adjustments to the standard pricing formula and used the adjustments to collectively re-negotiate the standard pricing formula with the scrap merchants; and
  • agreed on premiums that were applied by different tiers of scrap merchants when selling scrap metal. The premiums were then structured as discounts off the formula price and, on an annual basis, agreed amongst themselves the premiums to be applied by different tiers of scrap merchants and used their agreement as a basis for re-negotiating the premiums with the scrap merchants.

CONCLUSION

Columbus entered into a consent agreement with the Commission and paid an administrative penalty of R32 576 835,87 representing 7,9% of affected turnover for the financial year ended December 2007.

Based on the above, it is submitted that joint procurement could be deemed problematic when viewed in light of competition law. Therefore it is important to understand the bounds of a joint procurement arrangement.

[1]Competition Tribunal Case No 020297